DHHS Whistleblower Program Expands Rewards

Steve W. Berman on May. 7, 2013 | 0 comments

Charles Munger, vice-chairman at Berkshire Hathaway, once gave a speech touting the importance of incentives in guiding human behavior.

He told the story of Xerox, who introduced a new and far superior machine to its customers, only to find that it was being outsold by its outdated and obsolete predecessor. Company founder Joe Wilson investigated the situation and found the problem. The sales team received higher commission bonuses on the older machines.

He also told the story of FedEx who in the early days of the company struggled to efficiently sort and move packages between its planes each night so they would be prepared to ship the next morning. The company, Munger claimed, tried everything to get the system to work more smoothly, but to no avail. Then finally, someone got the bright idea of paying employees by the shift, and letting them leave once their work was done, rather than paying them by the hour. With the incentive to finish quickly so they could leave early, the employees dramatically increased their efficiency.

Munger summed up the lesson with a maxim from Ben Franklin, “If you would persuade, appeal to interest and not to reason.”

As a whistleblower attorney, spotting motives and understanding incentives is very important. It not only helps in developing a case against a defendant, defining motive, opportunity and means. It also helps me to understand why whistleblowers choose to put their careers and livelihoods on the line to expose corporate wrongdoing.

I wish I could tell you that every whistleblower was motivated solely by a desire to make the world a better place. But like Franklin said, don’t look to reason, look to interest and incentives. The truth is that many whistleblowers are also motivated by the tremendous financial rewards available to those who recover significant funds for the government.

The cold hard truth is if we want to give more potential whistleblowers a reason to step forward and shine the light of public scrutiny on fraud, one of the things we need to do is improve the rewards programs available to them.

That’s why I was very excited to hear that the Department of Health and Human Services (DHHS) recently announced a proposed change to the rules of its whistleblower program. The program, administered by the Centers for Medicare and Medicaid Services (CMS), previously awarded a maximum of $1,000 to whistleblowers who exposed fraud in Medicare. The proposed new rule would increase that reward up to a maximum of nearly $10 million.

The proposed rule follows a number of other initiatives taken by the DHHS and CMS over the last several years to reduce Medicare fraud; steps that I applaud. Those steps are having a serious impact – last February the government reported that it recovered a record-breaking $4.1 billion in Fiscal Year 2011.

Despite the positive steps that have been taken, there is still a lot of fraud that goes unpunished. While estimates vary, the Government Accountability Office pegged losses in the program at nearly $50 billion, far larger than the government’s recoveries.

I hope and believe that the DHHS’ decision to expand rewards for whistleblowers will have a serious impact on closing that gap and returning money to taxpayers.

As a whistleblower attorney, I have some parting advice for potential whistleblowers under the expanded program.

Whistleblowers under this program, and other programs, should seek experienced legal counsel before moving forward with a formal tip to DHHS. A whistleblower attorney can make sure you know your rights and responsibilities as a whistleblower, as well as the risks of proceeding with a formal whistleblower complaint.

An attorney with experience prosecuting whistleblower cases can also help you develop your information to encourage the government to take action. DHHS will receive many more tips than the agency can fully investigate in the next several years; you want to make sure your information is actionable and credible.

SEC Whistleblower Program Begins Paying Awards

Steve Berman on Aug. 31, 2012 | 0 comments

2012 is quickly shaping up to become The Year of the Scandal on Wall Street – a tall order considering the run of disrepute we’ve seen over the past decade. One would think that just four years since the financial crisis that nearly brought our country to its knees, we would have learned some lessons about greed, malfeasance and outright fraud perpetrated on the American people by major financial institutions and publicly traded companies.

One would think. But that’s not the way it is playing out.

Take JPMorgan Chase. In May, it stunned investors when it announced the investment house had suffered a $2 billion loss in trading of complex derivatives called credit-default swaps. If the term credit-default swap sounds familiar, that’s because credit-default swaps on home loans played a leading role in causing the recession. I would have hoped JPMorgan’s traders learned their lesson the first time around.

Then, a week later, Facebook effectively botched the largest IPO in recent memory, seeding more uncertainty and doubt with already skittish investors. From the start, the offering was delayed and plagued by trading delays and other technical difficulties. Shortly after the IPO, Facebook’s stock began to fall, finally settling near 50 percent of its initial value.

Even worse, news reports suggested that Facebook’s lead underwriters reduced forecasts for earnings, but rather than making information public, selectively disclosed the information to key investors. Those claims will now be tested in court in a class-action lawsuit filed on behalf of investors who were allegedly left out of the loop.

Now to June: several regulatory agencies announced more than $450 million in fines against Barclays Bank for attempting to manipulate the London Interbank Offered Rate, or Libor, a key benchmark used to set interest rates on loans in the United States and internationally. While this sounds ethereal and complex, the scandal most likely affected the interest rates the average US consumer paid on mortgages, car loans or even credit cards, costing us billions of dollars in inflated interest rates.

These three scandals suggest that our financial sector is still plagued by corruption, patronage, and secrecy, the factors that brought our economy to the brink just a few years ago.

Once we staggered back from that near economic collapse, lawmakers clamored that we needed to do more in terms of oversight, arming organizations like the SEC with the tools necessary to hold these rogue actors in check.

It was good in theory, but doomed in practice.

The truth is that – no matter how well intentioned the policies – the SEC lacks the funding and personnel to prosecute even a small fraction of the fraud on Wall Street, let alone prevent it. Metaphorically, they are outgunned, and outnumbered.

I am hopeful, however, because the SEC now has a new tool to prosecute fraud – millions of honest, well-intending Americans.

The SEC’s new whistleblower program, established last year, offers rewards to those who report fraud and wrongdoing to the agency. These rewards can be significant, totaling up to 30 percent of the funds the government recovers after an SEC enforcement action.

And the program is working - after many appeals and procedural hurdles, the SEC finally announced the first whistleblower award under the program. The whistleblower, who chose to remain anonymous, will receive $50,000 as a reward for providing information regarding violations of the securities laws.

That might not seem like a lot of money in the grand scheme of things, but the announcement is much more than that – it is the proof-of-concept, a warning if you will, to every CEO that is considering using creative accounting to explain away a loss, or brokerage-house executive who is pondering trading on information he or she received sub-rosa. The warning is that if you plan to commit fraud, you better be very good at covering your tracks because now instead of just having to fool an understaffed agency, now you need to deceive every honest person in your organization who now has the power and the incentive to hold you accountable.

My prediction is two-fold.

First, I believe we will see a spate of announcements regarding prosecutions of bad actors, all resulting from tips from whistleblowers. This new program will shine the light of public scrutiny, and scurry they will.

Second, I firmly believe that, thanks to this program, we will see a slow but steady improvement in the behavior by Wall Street, in large part because of this virtual oversight.

Whistleblowers should be cautious, however. I would advise any potential whistleblower to speak with an experienced attorney before talking with the SEC. The SEC is receiving several tips each day, and a private whistleblower attorney can help develop your claim so that the SEC is more likely to take your case.

You can learn more about our whistleblower practice at www.hb-whistleblower.com.

Toyota Owners Forced to Continue Driving Ticking Time Bombs

Steve Berman on Jun. 1, 2012 | 0 comments

In the critically acclaimed novel Catch-22, a World War II pilot asks his squadron’s doctor about the sanity of another pilot, who continues to fly suicidal missions day after day with no fear of death.

The doctor confirms that the pilot must be insane and therefore should be grounded from any future missions. However, there is a catch. The pilot must ask to be grounded, but “anyone who wants out of combat isn’t really crazy, so I can’t ground him. That’s Catch-22.”

I was recently reminded of Catch-22 when a judge issued a ruling in our case against Toyota. In the case, we allege that a defect in the electronic throttle system and other part failures in most Toyota models cause sudden, unintended acceleration, or SUA, resulting in deadly car wrecks and crashes. We have asked the court to award damages to Toyota owners so that they can replace their defective vehicles and we seek an order requiring Toyota to install a fail-safe mechanism that can prevent SUA.

The judge’s decision uses reasoning right out of the novel. The trial court ruled that Toyota owners in Florida and New York may not sue Toyota until they have personally experienced SUA.

SUA often leads to serious injuries or even death. Like the pilot in Catch-22, the Court’s reasoning seems to be that drivers must continue to risk their lives driving a defective vehicle that is likely to accelerate suddenly out of control at any moment. Only after the car is wrecked and the driver injured can they challenge Toyota for selling them a defective product.

Now that’s a Catch-22.

Between 2000 and 2010, The National Highway Traffic Safety Administration (NHTSA) reported 89 deaths and 57 injuries attributed to unintended acceleration in Toyota vehicles. It’s difficult to understand Judge Selna’s decision in that context. How can we tell Toyota drivers in Florida and New York to roll the dice every time they drive their cars, risking serious injuries and even death? How can one say a car that has a risk of SUA is worth the same as a car that has a much lower risk and has better fail-safe features in the event SUA occurs?

Consider just one story of a driver who experienced SUA. On April 19, 2008, Guadalupe Alberto of Flint, Michigan, drove her 2005 Toyota Camry to work, a routine drive she had taken hundreds of times before.

She had never received a speeding ticket in all of her years of driving, but on that day, Ms. Alberto’s Toyota suddenly accelerated out of control, jumping a curb and flying through the air before crashing into a tree. She died instantly.

According to the Court’s reasoning, Ms. Alberto would have had no legal claim against Toyota until she experienced SUA. In other words, until it was too late.

For its part, Toyota has issued several recalls to “fix” the SUA problem, blaming sticky pedals and defective floor mats, but has denied that there is any defect in the electronic throttle system. All the while internally Toyota has replicated SUA in customers’ cars and acknowledged the cause as “ECM failure” or “ECU failure” or cause “unknown”.

A recent story on CNN’s Anderson Cooper lent additional proof to our theory. CNN’s investigators found an internal document, written in Japanese, which appears to note a SUA problem discovered in a test vehicle during pre-production trials. According to one translation commissioned by CNN, the document notes that the test vehicle experienced “sudden unintended acceleration due to wrong judgment made by the full speed range Adaptive Cruise Control (ACC) System.”

Even more alarming, Toyota did not share this document with the National Highway Traffic Safety Administration (NHTSA), who conducted an official investigation into SUA.

Beyond the immediate impact on Toyota owners in New York and Florida, the court’s decision will set an unfortunate precedent for similar cases in the future.

For instance, a video recently went viral on Youtube showing a 2010 Chrysler Jeep suddenly light on fire. In the video, the driver reacts quickly, swerving off the road to avoid running a red light.

The driver’s video explains that this is a known defect, but Chrysler has failed to respond to the problem. According to the precedent set by Judge Selna’s Toyota decision, Jeep owners who fear for their lives must wait for their cars to light on fire before they can take legal action against Chrysler.

In my view, the decision misses the entire point of our lawsuit. Car owners should not be forced to drive a ticking time bomb and wait until they are seriously injured in an accident. They deserve justice now, including compensation for the replacement of their defective and unsafe vehicles.

We intend to appeal this ruling and we will continue to fight for justice for Toyota owners throughout the United States. You can learn more about this litigation at www.hbsslaw.com/toyota.

Whistleblower Earns $14 Million Reward in Case against Bank of America

Steve Berman on May. 29, 2012 | 0 comments

In 1998, I worked with a number of very talented attorneys general to hold Big Tobacco accountable for the damage it caused to millions of Americans through years of deception, improper marketing and a number of other nefarious tactics. Until this coordinated effort, no one – not attorneys general nor the civil justice system – could lay a glove on Big Tobacco. They had a virtual army of attorneys and lobbyists, and mountains of cash to fund their effort to avoid accountability.

And it worked, for a while.

But thanks in part to a courageous whistleblower, former Brown & Williamson executive Jeffrey Wigand, Big Tobacco finally had its day of reckoning, and eventually agreed to an omnibus settlement of $206 billion – the largest settlement ever at the time.

Mr. Wigand publicly spoke out and said what we all knew, but couldn’t prove – that the tobacco companies knew cigarettes are addictive and lethal. He also explained that companies were using additives known to increase the risk of cancer and increasing the amount of nicotine in order to make them even more addictive.

Yet, in coming forward, Mr. Wigand took a monumental risk. He also paid a price for what he did; he found himself in a series of legal battles and the victim of a smear campaign orchestrated by his former employer. His wife divorced him and his two daughters left with her.

And as he attempted to shine the light of public scrutiny on Big Tobacco, he soon found that light reflected back at him. He had to defend himself and his accusations at every turn, in the media and in the courtroom.

Of course, Mr. Wigand was ultimately vindicated and is now heralded as a hero and a champion of the public interest. Hollywood told his story in the movie “The Insider” starring Al Pacino and Russell Crowe.

His story showcases the risks and rewards that are part of being a whistleblower. David can beat Goliath, but that doesn’t make the prospect of taking on Goliath any less scary. When challenged over big issues, corporations have the power and resources to fight vigorously and delay justice for years.

Still, I think the situation for whistleblowers is improving in this country. There is a renewed sense, driven in part by the disastrous behavior we all saw on Wall Street before the financial crisis, that whistleblowers should play an important role in deterring corporate fraud.

Consider the United States Congress, who took Wall Street’s malfeasance to heart and passed the Dodd-Frank Financial Reform bill, which includes two new whistleblower programs. Under the programs, individuals who report violations of securities or commodities trading and reporting laws may receive up to 30 percent of any fines or penalties the government collects.

Another longstanding law passed during the American Civil War called the False Claims Act protects whistleblowers who report fraud committed against the government. Congress recently strengthened this law to catch more fraud and protect additional whistleblowers. Those who present a valid legal claim and recover the government’s money are entitled to a reward. We represent a whistleblower under the False Claims Act, and like Mr. Wigand, he has fought a long, costly battle against powerful corporate interests.

Our client, a former employee at appraisal company Landsafe named Kyle Lagow, blew the whistle on Countrywide Financial, now owned by Bank of America, for what he believed to be widespread appraisal, appraisal review and underwriting fraud. First, he blew the whistle to the highest levels of the company. When they wouldn’t listen, he filed a lawsuit. He alleged that Countrywide and home developing giant KB Homes, among others, used a number of tactics to inflate the appraised values of homes and set up a sham review process.

Accurate home appraisals are important for many reasons. For one thing, they serve as a check on greedy home developers or bankers hoping to cash in on interest payments from an overvalued mortgage.

They are also very important for the Federal Housing Administration (FHA), a federal agency that helps low- and moderate-income homebuyers afford homes by insuring loans. Under the program, if a house goes into foreclosure, the government steps in, pays the bank the remaining amount due on the mortgage and takes ownership of the property. In order to qualify a loan for FHA endorsement, underwriters must follow strict guidelines, including guidelines about proper appraisals. If appraisals are inaccurate and a loan goes bad, the government is forced to pay an inflated price. This helps people who might otherwise have a hard time affording a home secure a loan, but it goes without saying that the government has to be really careful about what loans they insure.

What Lagow alleged was a pattern of violating the most important rules to qualify for FHA endorsement, including inflating appraisals across the entire country. He claimed that when the real estate market collapsed and homes began to go into foreclosure in record numbers, the government was forced to overpay for the full cost of the mortgages.

Lagow’s first sign that something was deeply wrong at Landsafe and Countrywide came in early 2005, when he had a meeting with the new LandSafe president, Todd Baur, who expressed interest in having Lagow’s team of appraisers work on large multimillion dollar properties. Lagow questioned the decision, noting that such properties require specialized experience and an incredible attention to detail to produce accurate appraisals. He felt that his appraisers simply weren’t ready for such a challenge, but Baur disregarded his concerns and pushed ahead with the project.

This was the first symptom of a much wider problem. What Lagow came to notice at both Landsafe and Countrywide was a culture that disregarded the most important rule of proper appraisals; to be neutral, appraisals must be completely independent of the lending side of the equation.

Instead, Landsafe and Countrywide executives, Lagow alleged, sought to break down the federal regulations that separate appraisers and bankers, creating an environment ripe for corruption. He attested that President Baur instructed Landsafe managers that the appraisal unit needed to change and that its role was to facilitate the closing of loan deals negotiated by Countrywide.

Lagow claimed that he saw the potential for corruption fully realized when a joint venture was announced between KB Homes, one of the nation’s largest home developers, and Countrywide. He recruited appraisers to work on KB Homes’ properties, only to see his staff turned away and told that the homebuilder would decide who would perform appraisals.

Lagow claimed that KB Homes was given the power to turn away any appraiser who refused to certify as accurate whatever inflated price the developer was trying to push on a homebuyer. If you think that sounds like a rigged system, you’re right.

An extreme example of this policy in practice was found in Houston. Lagow alleged that he uncovered a scheme in which only a single appraiser was given every single KB Homes project in the city. That appraiser somehow managed to do more than 400 appraisals per month.

We’ve all heard about robo-signing lenders who claimed to have a handful of workers reviewing thousands and thousands of pages of mortgage paperwork each day. It is hard to believe those workers actually paid very much attention to each case they reviewed, and it is even harder to believe that an individual conducting 400 appraisals in a month could possibly do a full and fair analysis of the properties’ values.

What is even more shocking, but makes perfect sense when you consider KB Homes’ and Countrywide’s motives, is that Lagow claimed this appraiser was paid far more than most appraisers, $450 per appraisal. That sure sounds like a quid pro quo to me: endorse inflated appraisals and be paid an above-market rate for the trouble.

Of course, there were upstanding appraisers who refused to cooperate. As he dug deeper, Lagow claimed he discovered explicit blacklisting of those appraisers whose conscience and professional integrity prevented them from participating in inflating home appraisals.

In 2007, for instance, Lagow claimed that an appraiser he recruited precisely because the appraiser had high ethical standards told Lagow that he had been told if he refused to change his appraisals, he would be no longer assigned to KB Homes properties. Lagow alleged that the appraiser in question refused to sacrifice his integrity, and was ultimately blacklisted not only from KB Homes, but from all Countrywide projects.

Lagow continued to raise these concerns with management, but to no avail. Instead, he was instructed to keep all ethical concerns out of writing.

At the same time, he was fighting a battle to obtain the documents necessary for his appraisers to even do their jobs effectively. He claimed that KB Homes and Countrywide refused to provide final sales documents. By withholding these documents, Lagow’s appraisers were forced to use other, less accurate price listings to determine how much a home had sold for.

This is important, because one of the biggest factors in appraising a home is the answer to the question, “What have comparable homes in the same area sold for recently?” Lagow believed that KB Homes was clandestinely reducing home prices at the 11th hour in order to secure a deal, but reporting the original, higher prices for the public data. This, Lagow claimed, corrupted the data his appraisers were forced to use and encouraged inflated appraisals. Despite repeated requests for the documents, Lagow claimed KB Homes and Countrywide did not provide them.

As Lagow dug deeper and allegedly found more illegal activities, he became more desperate to convince senior executives at the company to hear him out. The more vigorously he raised the alarm, however, the more he was marginalized and his job responsibilities were reduced.

Finally, he was contacted by a senior loan officer, who asked him to “review” appraisals in order to find “missed” value. As far as Lagow was concerned, this was a direct request to participate in a conspiracy to commit fraud. He noted that because no one had given his team the appropriate documents, any analysis would not support a change in the appraisals.

Lagow claimed that this did not stop the scheme. He noticed over the next two years that if an appraisal came in too low for Countrywide and KB Homes’ taste, it would mysteriously disappear from the files. Then, a new appraisal with a higher value would just as mysteriously appear and the loan would go through.

Finally, in absolute desperation, he sent two emails to the CEO of Countrywide, Angelo Mozilo. Shortly after, he was fired, told the company wanted to move “in a different direction.”

Like tobacco whistleblower Jeffrey Wigand, Lagow suffered over the next several years. Unable to find a job and suffering from cancer, his house went into the foreclosure process. His wife and five kids also suffered the punishment for having reported fraud, experiencing poverty and hardship.

Lagow did not give up, however. He contacted our law firm and filed a lawsuit under the False Claims Act. The government has resolved a $1 billion settlement with Bank of America, based in part on Lagow’s claims and evidence.

There is light at the end of the tunnel for Lagow, as he will receive a $14 million reward for his part in the case. The reward is well deserved.

The importance of whistleblowers today cannot be understated. Lagow’s courage, tenacity and willingness to walk through fire to expose wrongdoing are the defining virtues of a good citizen. His sacrifices humble all of us, and should push us to all think more deeply about how we can contribute to the public good.

Surprise Attack: Capital One's Balance Transfer Program

Steve Berman on Jan. 10, 2012 | 0 comments

On Christmas Day, 1776, with morale at an all-time low, George Washington famously crossed the Delaware River, launching a surprise attack on the British and their German mercenaries in Trenton, New Jersey.

The rout of the British forces and their Hessian mercenaries was a pivotal victory for Washington’s forces, and according to many historical scholars, a pivotal moment in turning the tide in terms of morale and recruiting.

Washington was credited with the victory thanks to his genius in perfectly timing the attack. He crossed the Delaware on Christmas night, and hit Trenton at 8:00 a.m.

The enemy, tired from a long night of celebrating, were not prepared for the sudden and unexpected attack. Washington’s forces quickly won the ensuing battle.

Fast forward 235 years, and I have to wonder if credit-card giant Capital One had the same thing in mind when they came up with their balance-transfer scheme – catch consumers where they weren’t looking and when they least expected a surprise.

I am talking about the Capital One Balance Transfer scheme.

Capital One’s program was offered as a means for consumers to transfer debts from one creditor to another. In principal, this can be advantageous to consumers by helping them to consolidate debts, or even save money by locking in lower interest rates.

Capital One promised cardholders a zero percent Annual Percentage Rate (APR) for the first year after a balance was transferred. At the same time, the company allegedly told its cardholders that when it came to normal purchases on their cards, they could avoid interest payments so long as they paid the balance on time each month.

On the surface, this program sounds appealing to consumers. For instance, students might use it to reduce the compounding interest on their debt for a year.

However, the way the program actually worked in practice made it very unappealing to cardholders.

Suppose a recent college graduate who has $10,000 in student debt decided to transfer that debt to Capital One. Once the debt was transferred, the cardholder’s account reflected two balances. The first balance was the student debt. The second balance, known as the “purchase balance” was the normal credit card debt incurred by using a Capital One card for normal purchases.

Now suppose that after transferring the debt, the cardholder spent $700 over the course of a month, resulting in a $700 purchase balance. The cardholder received a credit card bill and paid $700 to cover the card’s balance and prevent interest charges.

The next month, to the cardholder’s surprise, the credit card bill reflected a $700 reduction in the student loan debt, but no payment on the credit card debt. Instead, the bill showed interest charges on the balance that the cardholder believed they had paid off.

In other words, instead of applying the payments to the credit card, Capital One applied the payment to the larger, interest-free loans, resulting in interest charges. In some cases, these charges may be as high as 13 percent.

This came as a shock to many Capital One cardholders, who must have felt like the British at Trenton; caught completely unaware, despite paying their bill on time.

We believe that Capital One’s program is deceptive and that the company failed to accurately communicate how the program would work to cardholders.

That is why we have filed a class-action lawsuit on behalf of cardholders, alleging that the company violated several consumer protection laws in various states.

Our case will continue to move forward and we hope to force Capital One to pay back cardholders who allege they were deceived by the program.

The lesson for consumers is that you should always ask questions about credit card offers and do your best to read the fine print. If you pay close attention, you can spot some of the more obvious scams.

I sincerely hope that the Consumer Financial Protection Bureau, a new federal agency charged with exposing these scams, will act aggressively in the future.

Unfortunately, though, simply being vigilant is not a foolproof way to avoid scams and credit card companies are adept at exploiting loopholes to bypass regulators. Sometimes, when a credit card company is particularly skilled at deceiving cardholders, legal action may be the only option to recover lost funds.

Thalidomide in America

Posted by Steve Berman on Nov. 2, 2011 | 0 comments

On September 18, 1962, a baby boy was born in the small town of Brownfield, Texas. Immediately after he was born, doctors noted that the boy had serious and disfiguring birth defects. He was missing his right leg, including his foot. He had no fingers on his right hand and his right arm ended above the elbow.

The baby, named Philip Yeatts, has lived his life without the use of his right leg or hand. He persevered and grew into a strong-willed and determined man. In fact, he became a professional racecar driver, using a specially modified car to win a championship in the U.S. Legends Series in 2008.

Its tempting to end Philips’ story there, and honor his courage and determination to overcome his disability. But there is much more to this story. We believe that Philip was not simply victim of poor luck. We think that his birth defects were a preventable tragedy, side effects from a dangerous drug called thalidomide.

Those of us who were alive in the early 1960s remember the tragedy caused by thalidomide. The drug was widely available in Europe, given to pregnant women to ease morning sickness. We now know that the drug caused debilitating birth defects, resulting in thousands of infant deaths and shocking deformations throughout Europe and elsewhere around the world. The pictures Americans saw of thalidomide babies shocked the nation’s collective consciousness, infants with what appeared to be flippers where arms should be, among other severe malformations.

Yet, at the same time the tragedy seemed so far away. The FDA never approved the drug here, so it was never widely used in the U.S., or so we were told. Later, Billy Joel’s song “We Didn’t Start the Fire,” would juxtapose the European tragedy, “children of thalidomide,” with a much more American tragedy, “Starkweather homicide.”

The belief that America avoided the thalidomide tragedy has persisted for nearly 50 years now, but we believe we have discovered evidence that casts doubt on the story. Newly uncovered and translated documents, combined with new medical advances that help us to better understand how thalidomide works, suggests that there may be many victims in the United States that were never identified.

Even worse, our research has uncovered evidence that the thalidomide tragedy was foreseeable and preventable, but due to the greed of a number of drug companies, safety risks were overlooked and covered up.

The origins of thalidomide take us back to post-war Europe, specifically to the early 1950s in Germany. In 1953-54, German pharmaceutical company Chemie Grunenthal synthesized thalidomide for the first time, and subsequently received a German patent to begin producing and distributing the drug. Grunenthal originally considered the drug a panacea, or at least marketed it as such, claiming it could cure everything from the common cold to premature ejaculation.

New documents suggest that on Christmas Day 1956, an earless baby was born to the wife of a Grunenthal employee who had taken thalidomide during pregnancy. Yet, instead of slowing down development and running more tests, the company continued to push ahead. A mere 10 months later, in October 1956, the drug was released for commercial, over-the-counter sale in Germany.

In 1956, the company entered into an agreement with U.S. pharmaceutical company Smith Kline and French (SKF) to begin domestic testing of thalidomide on animals and humans, including pregnant women.

By August 1958, a pregnant woman participating in the SKF trial delivered a malformed baby. Unlike Grunenthal, who decided to move ahead with the drug, SKF declined to market it in the U.S. However, from what we have seen, the company never let the public know about its test results. The failure to disclose test results is no trivial matter; it is possible that if SKF had sounded an alarm bell early, the distribution of thalidomide in the United State and elsewhere might have been slowed, and less people would have been exposed to the drug.

Having failed to convince SKF to distribute the drug, Grunenthal signed a U.S. distribution agreement for thalidomide with the William S. Merrell Company. Merrell began human trials simultaneous with animal trials in February 1959, and expanded the trials to include pregnant women in May 1959, all while conceding that it had no access to any human clinical safety data.

We believe that sometime during 1959, Grunenthal destroyed its testing data. In September 1960, Merrell submitted a New Drug Application (NDA) with the FDA for commercial sale of thalidomide, which Merrell named Kevadon. The proposed label in the application specified that the drug was intended for use by pregnant women.

One month later, Merrell began its “Kevadon Hospital Program,” a series of large-scale “clinical trials” that we believe were nothing more than a marketing effort to pave the way for expected sales of the drug in the United States. Merrell kept disorganized and occasionally nonexistent records of who, where and when Kevadon was distributed and even informed doctors that they did not need to keep records of the “studies” either. Again, the drug was recommended for use treating morning sickness in pregnant women.

As part of this trial, we believe that more than 2.5 million doses of the drug were given to more than 20,000 patients. While those trials ran, the FDA’s Dr. Frances Kelsey repeatedly denied Merrell’s application to sell thalidomide, deeming its testing to be incomplete. She encouraged testing on pregnant animals.

Then, the truth about the drug began to come out. In July 1961, Australian Dr. William McBride suspected that thalidomide was responsible for recent birth-defect cases and contacted Distillers, the Australian distributor and licensee of thalidomide.

On November 26, 1961, German newspaper Welt am Sonntag, published an article revealing physician suspicions that thalidomide was causing malformations in babies. Grunenthal pulled the drug in Germany, but continued to dispute claims that thalidomide was responsible for the defects. Merrell did not pull its NDA, did not recall the drug and only alerted about 10 percent of its clinical investigators of the danger.

Sometime during the first three months of 1962, Jerry Sue Yeatts of Brownfield, Texas, began suffering from violent morning sickness and went to her physician, Dr. Noah Stone, for help. He prescribed a drug for her illness but did not tell her the name. He also performed at least one sonogram but did not share the results with her. Multiple babies born to Dr. Stone during this time period suffered from birth defects and several died.

On March 8, 1962, Merrell finally pulled its NDA. Like Grunenthal, Merrell contested the claim that thalidomide can cause birth defects and sent letters to doctors disputing the evidence against thalidomide.

In June 1962, Merrell’s Director of Medical Research Dr. Carl Bunde testified before Congress that thalidomide was never sold in the U.S., leaving out the fact that 2.5 million doses had been distributed to 20,000 people by 1,200 doctors.

Two months later, SKF President Walter Munns was also called before Congress, where he claimed that SKF’s clinical trial participants had not given birth to any babies with birth defects, a claim that we believe newly uncovered documents prove was a blatant lie intended to cover up SKF’s guilt.

On September 18, 1962, Phillip “Hook” Yeatts was born to Jerry Sue in Brownfield, Texas. He is one victim, we believe, of a silent epidemic that occurred in the United States during the early 1960s as a result of widespread distribution of thalidomide through a marketing program thinly disguised as a clinical trial.

Yeatts was overlooked as a possible victim of thalidomide not only because SKF and Merrell temporarily succeeded, we believe, in covering up the extent to which the drug was distributed in the U.S., but also because new medical advances have changed our understanding of thalidomide victims.

Yeatts’ deformities are mainly unilateral, affecting only the right side of his body. When thalidomide was first being studied and its horrific side effects being assessed, it was thought to be primarily a neurological drug that caused only bilateral injuries – those affecting both sides of the body. Through some very innovative new cancer research, it is now believed by many doctors that the drug’s mechanisms are actually vascular, enabling it to cause unilateral injuries as well. In the original judgment of thalidomide’s damage, anyone with a unilateral injury like Yeatts’ was summarily discounted as a victim.

Yeatts, along with 12 similarly affected plaintiffs, is part of a new lawsuit we have filed in Philadelphia. At trial, we will show that new documents prove that Grunenthal, SKF and Merrell were criminally negligent, ignoring the hazards of thalidomide and keeping the public in the dark.

The worst element of this entire situation is only now coming to light – the fact that hundreds or thousands of people who have struggled with birth defects their entire lives were originally told that they were just unlucky, when in fact they were victims of a senseless, preventable tragedy.

As Billy Joel might have said, we may not have started the fire, but the least we can do is care for those burnt by the flames.

Whistleblowers an Effective Tool to Catch Tax Cheats

Posted by Steve Berman on Sep. 27, 2011 | 0 comments

A few weeks ago, perhaps the most reclusive and storied tax cheat in the modern era was discovered after more than 20 years in hiding. William Millard, the billionaire tech tycoon who founded ComputerLand, a popular retailer during the 1980’s, was found by investigators on Grand Cayman Island in the western Caribbean.

Millard reportedly went missing in 1990, when he and his family left Saipan. The local government, who claims he still owes millions in taxes, has been trying to track him down ever since. In the meantime, his outstanding tax bill has climbed past $100 million.

The arrogance of such behavior aside, Millard’s case is fascinating because he was able to stay hidden from the authorities for so long. One would assume that, at some point, someone would spot him and turn him in. After all, he was hardly hiding very effectively; authorities tracked him down to a large mansion, not exactly the best hideout.

Millard’s case reflects two key issues that governments face when collecting tax revenues. First, it can sometimes be hard to prove a violation and track down the tax cheat. Second, and this is the larger issue in the Millard case, complicated offshore structuring and strategic use of loopholes can make assets difficult to find.

Michael Kim, one of the lawyers working on that aspect of the case said, “This is one of the most sophisticated and complicated cases of offshore asset structuring that we have ever seen. He’s had more than 20 years to move money all over the world.”

In such difficult cases, governments need all the help they can get. A crucial resource in these investigations are insiders, especially accountants and auditors at major corporations, who report violations to the government. In order to encourage these whistleblowers to come forward, Congress passed a law in 2006 that rewards them with up to 30 percent of the money collected in a successful enforcement action by the IRS.

This reward can be quite the motivation. Consider that if someone had informed on Millard under the program, he or she might eventually receive $30 million, while at the same time saving taxpayers $70 million.

The Government Accountability Office, or the GAO, Congress’ watchdog and research agency, recently evaluated the program. Five years after the program’s passage it is struggling, according to the GAO’s report.

The scope of the problem is daunting. A number of loopholes have allowed corporate tax cheats to draw out the process for years. In fact, according to the report, two-thirds of the claims submitted in 2007 and 2008 are still in process.

Well-intentioned privacy regulations also stand in the way of the program’s success.

For instance, the GAO found that the IRS fails in many cases to effectively communicate with whistleblowers. In keeping with its strict interpretation of privacy protections, the IRS will not inform whistleblowers on the progress of their claim, for fear of violating the law by releasing information about the violator’s taxes.

The only thing the agency will do, according to the GAO, is confirm that the claim is either open or closed.

If the IRS finally rejects a whistleblower’s claim, no reasons are given, again, for fear of violating regulations governing the release of confidential tax information. After all, if the IRS were to tell the whistleblower that the tip turned out to be inaccurate, that would be disclosing that the IRS conducted an audit.

Even when the IRS does take a case and succeeds in bringing a large tax cheat to justice with the help of a whistleblower reward, the agency does not publicly comment on the reward, again for fear of revealing confidential information.

This information blackout discourages potential whistleblowers from reporting what they know. After all, without a credible example of success and a high probability of a reward, a potential whistleblower is unlikely to risk their career in order to expose the truth.

Yet, it is hard to blame the IRS. They are playing it safe and following the rules, and I would suggest that legislators look at the issue. A balance has to be established between protecting the privacy of alleged tax violators and giving whistleblowers the communication and reassurance they need to come forward.

Perhaps the biggest challenge facing the program is the agency’s limited resources. Implementing some of the reforms suggested by the GAO may not be possible at this time.

Limited resources at the IRS have long been a problem, but with the current cuts being considered, conditions have gone from bad to worse. Earlier this month, the Senate Appropriations Committee voted in favor of a four percent cut to the IRS’ budget. The House Appropriations Committee voted to cut even more.

I would argue that these cuts are ill-advised, not simply because the program is valuable, but because successful prosecution of claims against tax cheats will create revenue, helping to solve our debt problem by closing the over $350 billion gap between what the government is owed and what it collects each year.

The benefits of this program clearly far outweigh the costs, and it is both the taxpayer and the government’s interest to give the IRS the resources it needs.

Even if budget cuts are enacted, there are steps the IRS can take to improve the program. Senator Chuck Grassley (R-IA), the architect of the whistleblower program, recently argued that the IRS is neglecting a crucial tool that can help it to take on more cases without spending more money.

According to the senator: “A key provision of the whistleblower law, and a big part of the success of the False Claims Act provisions that I co-wrote, is to allow the government to leverage the whistleblower’s resources. It’s worrisome that the IRS hasn’t taken advantage of this provision even once. The tax cheats shouldn’t be the only ones who can take advantage of outside legal talent.”

In other words, the IRS can employ private attorneys, who represent whistleblowers, to do research and develop claims for the IRS. This could lighten the load on the agency, help it process more claims and ultimately, catch more tax cheats and collect additional revenue for the treasury.

That’s why, when the government of the U.S. Commonwealth of the Northern Mariana Islands decided to investigate William Millard’s disappearance in hopes of forcing him to pay his outstanding taxes, they hired a private law firm. That firm’s investigation led to a breakthrough that uncovered Millard.

The IRS would do well to remember that it has allies in its battle against tax cheats, both in the form of whistleblowers and their attorneys.

College Sports: A New Gilded Age

Posted by Steve Berman on Sep. 27, 2011 | 0 comments

In 1969, Curt Flood, center fielder for the St. Louis Cardinals, was traded to the Philadelphia Phillies. Flood, who was black, knew that the Phillies reportedly had some of the most racist fans in baseball and expressed his concerns to management. At the time, Major League Baseball’s rules tied the player to the team; he had to move where management sent him or not play at all.

Flood sent a letter to then Baseball Commissioner Bowie Kuhn, saying, “I do not feel I am a piece of property to be bought and sold irrespective of my wishes. I believe that any system which produces that result violates my basic rights as a citizen and is inconsistent with the laws of the United States.”

These are strong words, but to many in professional baseball at the time, the rules tying a player to his team sounded an awful lot like slavery; players were bought and sold as a commodity.

Flood sued and took his case all the way to the U.S. Supreme Court. The court ruled against him, but the case set the stage for future negotiations that gave players the right to contract with any team they wished.

Recently, I saw a fascinating article in The Atlantic that reminded me of Curt Flood. Taylor Branch, a noted Civil Rights historian, wrote a piece titled “The Shame of College Sports.” in which he exposes some of the scandals and hypocrisies in college sports.

Many of the injustices that Flood and others succeeded in ending pale in comparison to the scandals still ongoing in college sports.

The worst of these scandals, which threatens to topple the NCAA, is that the organization collects millions upon millions in revenue each year, profits earned off the back of student-athletes. Those student athletes are plastered with corporate logos and sold to the public, but they are not paid for their services.

Branch stops just short of calling this system slavery, but he does conclude that “to survey the scene – corporations and universities enriching themselves on the backs of uncompensated young men … is to catch an unmistakable whiff of the plantation.”

I don’t think there is a moral equivalence between the NCAA and slaveholders, but the conditions for student athletes today certainly compare to another time period in American history; the gilded age. Throughout the industrial revolution and especially during the last 30 years of the 19th century, American workers found themselves slaves in all but one sense; they at least had a theoretical option to leave the job site and look for work elsewhere.

Of course, in practice, the decreased demand for unskilled labor brought about by automation meant that workers had no other option but to accept long work hours and unsafe working conditions in exchange for a low, unlivable wage.

If workers did strike, they could be assured that strikebreakers would be brought in immediately, sometimes with the support of the government. Jay Gould, a railroad owner and one of the richest businessmen in the second half of the 19th century, once said after bringing in strikebreakers, “I can hire one half of the working class to kill the other half.”

You probably won’t hear NCAA executives talking like that about student athletes, but the systems share many similarities.

Consider one of the first reforms passed in the wake of the worst abuses: workers’ compensation. During the industrial revolution, workers routinely found themselves in unsafe working conditions. They operated hazardous machinery in factories and breathed in toxic dust in mines. Cutthroat factory owners responded to injuries by firing workers and replacing them.

Today, high school recruits choose which college to attend, at least partially, based on that school’s scholarship offer. For lower- or middle-class athletes, the prospect of a scholarship is a dream come true, allowing them to earn a degree they otherwise might be unable to afford.

Yet, these student athletes, who the NCAA constantly reminds us are students first and athletes second, are forced to give up their scholarships when injured on the field.

We are currently litigating a case on behalf of a young man named Joseph Agnew. A highly sought-after high school football prospect from Texas, Agnew was courted by several top-tier Division I schools. He ultimately decided to accept a full-ride scholarship from Rice University.

We allege that during his sophomore season with Rice, Agnew sustained shoulder and ankle injuries on the field, and, as a result, his scholarship was revoked. Our case on behalf of Agnew is still working its way through the courts.

The way student athletes are compensated also bears a striking resemblance to the gilded age. One could draw a strong comparison between scholarships and the “company money” given to workers in some industrial towns.

Instead of being paid real wages, workers were often given company money, good only for buying goods and services from a company store. This allowed scrupulous robber barons to avoid paying workers a real wage and created a closed loop that allows them to profit again, selling workers goods at inflated prices.

Consider the scholarships that are given to student athletes today. Scholarships can only be used to pay for tuition at the institution offering the scholarship. Just like in company towns during the gilded age, the employer, or in this case, the university, profits without ever having to pay a real wage.

This practice illuminates the greatest problem with the NCAA today, the massive discrepancy between what student athletes earn for their work in the form of scholarships and what their services are worth.

By any estimation, the talents of student athletes are worth millions to the NCAA and its member universities. Revenue rolls in continuously from lucrative television deals, sponsorships, merchandising and even video game licensing.

That last revenue source is especially troubling, because students’ likenesses were featured in the games. A few years ago, we filed a lawsuit on behalf of a former starting Arizona State quarterback named Sam Keller, who alleged that the NCAA violated its own bylaws by conspiring with a video game company to use students’ likenesses, making millions off students who were not compensated.

Meanwhile, at the professional level, the NFL Players’ Association is paid $35 million each year for the right to show players’ likenesses in NFL video games.

All of these injustices demonstrate a system in serious need of reform. Student athletes have been made to suffer under this system for far too long.

I am hopeful, though, that change is coming. I believe that the NCAA will be forced by the outcry from politicians, educators and the public to reform its operations in the coming years.

Such reform will come not a minute too soon for thousands of student athletes, who deserve fair treatment and compensation for the services they provide to their schools.

Improving Whistleblower Programs

Posted by Steve Berman on Aug. 29, 2011 | 0 comments

In politics, language is everything. The politicians know that if you frame an issue properly, you are halfway to winning the battle. That’s why we often end up with names for laws that are terribly misleading or otherwise infused with partisan language.

There are many examples of this in the storied and often checkered past of American politics. Ronald Reagan had a delft touch in this; he came up with The Peacekeeper Missile. Two decades later, the Republican Party continued the practice of ‘winning by framing’ when the anti-choice wing introduced a bill banning certain types of abortions by calling the legislation “The Partial Birth Abortion Ban.”

Today, the trend continues. The Patient Care and Affordable Care Act becomes Obamacare. The Patriot Act was a convenient acronym and, to be fair, much easier to say than its full name, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act.

Recently, a piece of legislation called the “Whistleblower Improvement Act of 2011” was introduced in the U.S. House of Representatives. But far from improving whistleblower programs, the legislation would stop them before they get off the ground.

The proposed law would require whistleblowers to report fraud internally first, almost certainly tipping off the wrongdoers and giving them time to destroy evidence. It would also strip protections for whistleblowers whose employers retaliate against them for turning informant.

The bill, introduced by Representative Michael Grimm of New York, is currently being considered by the House Committee on Financial Services. Although it may pass in the House, it is fortunately unlikely to pass in the Democrat-controlled Senate.

One of the programs such a law would undermine is the Commodity Futures Trading Commission’s (CFTC) new whistleblower program, which was finalized last week. The program, nearly identical to the Securities and Exchange Commission’s program, will reward whistleblowers with up to 30 percent of the recovery if they provide information that leads to a successful enforcement action.

This program will help expose fraud in a number of areas and help to prevent another financial disaster like the one we saw in 2008. For one thing, thanks to new mandates from Congress under the Dodd-Frank Financial Reform Bill, the CFTC will have the authority to regulate the swaps market.

The swaps market played an important role in the financial crisis when American International Group (AIG), a massive international insurance company, used swaps to insure the investments of companies that held risky mortgage-backed securities. AIG collected premiums from the holders of this incredibly risky debt, offering to pay its policyholders a specified amount in the event that the loans went bad.

Of course, we know now that these investments included sub-prime loans made by predatory lending institutions that knew, or should have known, that the loans could not be repaid on time. When the loans began to go bad, policyholders put in claims with AIG, which soon found itself bankrupt and in need of a bailout.

If someone at AIG, or any one of the financial institutions it insured, had spoken up earlier to alert the government that they were trading in loans that were almost certain to go bad, the government might not have been forced to bail out the company.

The CFTC also regulates commodity futures markets, in which investors bet on the future price of various goods, such as oil or gold. The potential for fraud in these markets is immense, and a robust whistleblower program will help to deter it.

For instance, when the price of gas began to climb to record levels late this spring, President Obama and the Department of Justice launched an official investigation. The investigation is continuing to look into the role that commodity traders played in raising the price at the pump and whether or not any illegal activities have taken place.

A robust whistleblower program will strengthen this investigation and others like it in the future. It will help deter fraud by raising the risk of an insider turning informant.

Such a tool is even more necessary because the CFTC is chronically underfunded and undermanned. The swaps market alone is worth approximately $600 trillion per year, and that is only one part of the agency’s job. Yet the agency only has a budget of $202 million. Instead of getting a budget increase along with its new responsibilities under Dodd-Frank, a bill recently passed by the U.S. House of Representatives would instead cut its budget by 15 percent.

The whistleblower program will help relieve the burden on the CFTC, allowing it to do its job more effectively, but its limited resources will mean that it can only take on the most well-developed and credible cases brought by insiders.

Private attorneys will be needed to develop clear and actionable claims for the CFTC. At Hagens Berman, we have extensive experience in financial fraud cases as well as traditional False Claims Act qui tam cases. We also have a track record of taking on and defeating some of the largest companies in the United States.

In the coming years, we will be representing whistleblowers that expose fraud in the areas the CFTC regulates, including the derivatives and commodities markets.

That fraud will not be brought to light if Congress dismantles the program, and that’s why, even if the name sounds nice, we can not endorse the Whistleblower Improvement Act.




Creative Destruction and the Ebooks Market

Posted by Steve Berman on Aug. 16, 2011 | 0 comments

In 1982, Clint Eastwood appeared before a congressional committee to testify about the dangers of VCRs. He testified alongside Jack Valenti, then president of the Motion Picture Association of America.

Fearing that the VCR would destroy the film industry, Mr. Valenti argued, “the VCR is to the American film producer and the American public as the Boston Strangler is to the woman home alone.”

Frankly, I think the line would have sounded better coming from Dirty Harry.

Americans bought the VCR despite the film industry’s objections and by innovating and providing high-quality recordings, the film industry benefited from the invention. It also encouraged innovation at theatres, which, having lost some of their power over moviegoers had to find new ways to attract customers.

In 1942, author Joseph Schumpeter coined the term “creative destruction” to explain how new technologies can supplant old ones and radically change an industry. When this happens, established players, usually relying on an older business model, do everything in their power stop innovation and preserve the status quo.

Nothing has caused more creative destruction in recent years than the internet. To name one example, the film industry now fears Netflix at least as much as it ever feared the VCR. So it is hardly surprising that in response to Netflix’ success, the industry is refusing to grant immediate access to new releases, fearing the availability of titles on Netflix will cannibalize rental and DVD sales.

The internet also threatened to change a much older industry; the book publishing business. Advances in display technology have enabled a new wave of devices that allow an entire library of ebooks to be stored in the palm of your hands.

To be fair, this isn’t the first time the book business has undergone such a change. Following the invention of the printing press in the 15th century, a monk and scholar named Johannes Trithemius wrote an essay entitled “In Praise of Scribes.” Trithemius worried that the printing press would not only put scribes out of work, but also make monks lazy. After all, copying the Bible by hand built character.

It should come as no surprise then, that the age-old giants of the book publishing business have concerns over the inevitable transition to ebooks.

In fact, we recently filed a fascinating lawsuit alleging that five of the largest publishers, with a helping hand from Apple, cooked up an illegal agreement to slow down and control the growth of ebooks by fixing prices.

Ebooks have certainly increased in popularity over the last few years, especially since Amazon’s release of the Kindle in 2007. There had been ebooks before then, of course, but the Kindle’s paper-like screen and realistic looking text made it the first device that was truly accessible to mainstream consumers. Reading on the Kindle is as easy as reading a real book.

Following the release of the Kindle, Amazon began offering large discounts on ebooks in order to encourage the adoption of the device. Amazon set a price of $9.99 for all new releases, even if that meant it had to sell some ebooks for a small loss.

This is in line with how books have been sold in the past, under what is called the wholesaler model. Under this model, publishers sell books to retailers like Barnes and Noble or Amazon who then can set a price for the book and resell it to consumers.

The wholesaler model encouraged retailers to compete on price, allowing consumers to bargain-shop for discounted books. While consumers celebrated $9.99 new releases, the publishers worried. If people became used to paying $9.99 for a fiction or non-fiction new release, they might demand low prices in the future.

Worse still, if Amazon became the dominant retailer in the ebook market, they too might pressure the publishers to lower their prices.

At the height of publishers’ anxiety over Amazon’s low prices, Apple was looking to get into the ebook market. With its iPad consumers who already used the iTunes store for music, movies and other media would be able to purchase and read ebooks.

We believe that Apple feared Amazon’s low prices, and worked with the publishers to cook up a plan that would not only force Amazon to raise its prices, but also help publishers to regain some of the power they had lost since the advent of electronic publishing.

Nearly simultaneously last year, five of the largest ebook publishers announced that they had reached a deal with Apple to publish ebooks for the iPad. This deal had two major components. First, it guaranteed that no ebook could be sold for a lower price than on Apple’s iBookstore.

Second, the deal restructured the age-old “wholesaler” model for selling books and instituted a new “agency” model. Under the model, retailers would no longer be able to discount books. Instead, the publishers would set the prices for ebooks, and retailers would be entitled to a pre-determined markup, in this case 30 percent, on each book sold.

Following signing of agreements with Apple, the five publishers approached Amazon and informed the retailer that due to both of these clauses in their contracts with Apple, Amazon would also have to switch to an agency model.

Amazon, faced with losing access to books from five of the six largest publishers, capitulated and agreed to the change.

The new system was clearly not helpful to consumers, as it meant that they could no longer shop for a bargain amongst retailers. Instead, prices at each retailer would be identical. Alongside the elimination of competition between retailers over price, the agency model allowed, we believe, a 30 to 50 percent increase in the price of the ebooks.

Each publisher’s decision to sign an agreement with Apple was not illegal by itself. What would be illegal, however, would be the coordination of five of the largest publishers joining forces to thwart price competition. Given the nearly simultaneous timing of the actions of these five publishers, and the fact that their actions coincided with the launch of the iPad, we believe there was coordination.

Apple’s part in this is troubling as well. The company played a large part in the transformation of our daily lives over the last several decades. If our suspicions are proven true, then it acted to prevent innovation in order to increase its profits.

We have filed suit against Apple and the publishers for violations of the federal antitrust laws. These laws protect consumers from artificially high prices caused by anticompetitive activity. More importantly, though, these laws encourage innovation in the marketplace by preventing competitors from joining forces to slow down market-driven changes.

In addition to our work to preserve innovation by litigating antitrust cases, we recently opened a new intellectual property practice. Our IP practice seeks to protect the rights of inventors, who often face infringement from large corporations with legions of defense attorneys.

Those inventors rely on patents, which provide an incentive for them to innovate, and to continue transforming our world for the better. Their rights as inventors must be respected.

Innovation is the lifeblood of our economy. Whether it is threatened by a large company determined to infringe on an inventor’s patent or by collusion and anticompetitive behavior by a group of companies, we will work tirelessly to preserve it.

I think that even Dirty Harry would agree with that.

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